Embezzlement: It can happen to you and what to do about it
We were last talking to Randal DeHart about accounting and how finding the right client can drastically help improve business profitability. We continue our discussion on the impacts of bookkeeping and the critical issues of embezzlement, and how to spot them.
In this Interview Learn:
- Common bookkeeping issues plaguing business
- Embezzlement: How a bookkeeper got away with over $3 million
- Signs of a Horrible bookkeeper
- Simple tests you can do to spot embezzlers
- How to find and keep great bookkeepers
Can bad Bookkeeping really ruin a business?
I’ve witnessed business failures that have led to divorce, destroyed families, finances wiped out, and people living on the streets. In a few extreme cases I know of people that have taken their own lives and it needs to stop!
There are two ways bookkeepers can ruin businesses.
Good intentions, with incompetence.
Bad Intentions, with Embezzlement.
Most trades like plumbing and bookkeeping can be learned in about 6 months.
When looking for a good bookkeeper, there are certain things to look for. Say a bookkeeper has 10 years experience. You want to ask them, “What’s the last book on accounting you’ve read? What’s the last accounting seminar or class you’ve been to?”
If they answer they hadn’t done any of those in 10 years, then they’re just a bad bookkeeper with 6 months experience 20 times over.
Their mind is a dead, stagnant swamp.
They won’t reconcile bank statements or credit card statements properly.
They will look at the very bottom of Credit Card (CC) statements:
- Beginning balance: $1,000
- Ending balance: $2000
- Purchases in between were $5,000
They put one journal entry as Misc. Expenses $5,000.
I see this all the time, when I ask the bookkeeper, “Why didn’t you put in all the transactions?”
They reply, “It didn’t make any sense, it’s just a waste of time.”
Then when we go over the statements together. I spot anomalies, the favorite charge ending in .97 cents. $19.97, $21.97, $100.97
Anything over $100, the business owner will ask their bookkeeper to look into. Usually the bookkeeper never does, this goes on for a few months before they realized that their CC number has been hacked.
This is very common in business. Somebody online has stolen the identity of the CC. If a personal card was stolen, it’s usually just one or two large purchases before they run away. But in business, stolen account information is tested with small amounts like $19.97. Then they keep raising numbers to test whether they get caught or not.
This is one of the ways a bookkeeper can ruin a business. They do not watch out for any credit card anomalies or reconcile with vendors. They need to watch them like a hawk.
Another issue is improper billing. Sometimes, you can be sent a bill by mistake.
We had one client that had this problem. We looked at his books. His 6 month old statement showed several charges done by a vendor that shouldn’t have been there.
I asked if he worked in Eastern Washington, which he replied no. Well somebody was billing him from there. We called the supplier and tracked down the bill. The bill was keyed in wrong, it was supposed to be for another person.
So if the bookkeeper doesn’t properly audit and reconcile statements, many times the suppliers will charge you for somebody else’s bill.
Another thing we do with our clients is, we can easily make them a no risk 36% return, guaranteed. We look at their books. Some of their suppliers offer a 2% discount if they pay by the 10th.
If we look at it from another angle. They’re saying, you owe me $1,000 from last month’s purchases. You can borrow that money for 20 days and I’ll only charge you 2%. If you take 360 days / 20 there is 18 periods. So 18 x 2% = 36%
Or you can take your CC and pay the bill off on the 10th and suddenly you’re making a little bit of money.
“To grow profits by an inch, is a cinch. To grow profits by a yard, is hard”
They lose you money by not taking advantage of discounts.
Most importantly, the bookkeeper needs to file tax returns on time. Sales tax returns, payroll returns, etc.
When you get an overdue notice from the IRS, the interest rate on the bill can easily be north of 300% for the year.
Bookkeepers ruin a business by little leaks here and there. Money going out here and there. It’s the “little leaks that sink the ship.”
Incompetent bookkeepers also ruin businesses with money coming in. By simply not getting invoices out on time.
Often an owner verbally tells their bookkeeper to send a client a bill. The bookkeeper says they’ll do it later, because their busy looking at Facebook.
We look at our clients invoices (AR) and who owes them money.
I asked one client, “You bought a lot of material here during this month. What was it for?”
“Oh, it was for the x,y,z job last month.”
“Where’s the invoice for it?”
“Oh crap, we never sent it. Mary, why didn’t you send the invoice for that job?”
Mary: “Bob, can’t you see I’m busy surfing the web, looking at cat videos?!”
Those issues sound unintentional. What are the intentional embezzlement issues?
Embezzlement is rampant and horrid.
You have to be aware of the 10/10/80 Rule. This rule was discovered through many years of experience and first hand observations from accountants, auditors, and fraud examiners.
The Bad 10% of all employees including bookkeepers will steal in a variety of ways from office supplies and petty cash. They’ll accept kickbacks and payoffs from suppliers, vendors, and subcontractors and steal hundreds of thousands or even millions of dollars.
They will do it regardless of how many security systems are in place because they lack integrity and have a “take all you can get” entitlement paradigm. They cannot be stopped, only caught!
The Good 10% of all employees including bookkeepers will never steal because they have integrity and a “Producer’s” paradigm where they think it’s better to make than to take. These are the professional masters of their trade.
In the end these are the people who will add so much value to your company that you cannot help but reward them with more money, benefits and recognition. Because if you don’t, they’ll be recruited by your competitors.
The Other 80% of all employees including bookkeepers will steal if they feel certain they can get away with it and if circumstances allow for it due to weak integrity and having a mentality of “redistributing wealth, but not the work or responsibility”.
True story: This guy calls in. He does a lot of construction work for the school district in his area on grade schools and high schools. His revenue is in excess of $20,000,000 a year.
He calls and tells me,
“I’m doing over $20 million a year in sales, and I can’t even bring home $100,000. Something is wrong.”
Told him to come to the office with his bookkeeper. Opened up his Quickbooks and after a few minutes saw all the red flags.
Told his bookkeeper I was a psychic and was gonna gather some details.
“I see you have a nice tan, people out here in Washington don’t tan, we rust. So did you recently come back from hawaii or the caribbean?”
“Yeah, just got back from hawaii, we go 2-3 times a year.”
“You have some nice Oxford shoes, those run about $500 a pop?”
“So your BMW, is it a ragtop? White or black?”
“It’s a white convertible, how’d you know?”
Looking at the owner, “Can I tell it to you straight?”
“Go ahead, I’m a straight shooter.”
“Most embezzlers love BMW, the bigger embezzlers love convertibles.”
“Are trying to imply something?!”
“Your bookkeeper is a damn embezzler!”
The contractor was livid, “What are you saying?!”
“Your bookkeeper is embezzling money from you, and lots of it. I see over a million being embezzled from you here.”
“How can you say that?! You no good, #@%! He’s been a family friend for years!”
“It’s quite simple, because Acme Supply is in Road Runner Looney Toons, but not in real life. And very few send bills for $893.97. All of these bills end in .97 cents.”
It’s a big red flag to see so many transactions end in .97 cents.
They both were angry and stormed off, threatening to call their attorneys.
After about 7 months, the guy calls up asking for another meeting.
“You insulted me at the first meeting, you gotta make up for it.”
“What can I do for you?”
“On the way here, swing down to the store and grab me a pack of Dr. Pepper, in the glass bottles. We’ll crack open a Pepper and discuss your case”
He comes by with the six pack. First thing he said was, “You were so wrong, how can you be so stupid and so wrong?
“Well, flattery will get you nowhere.”
“It was over $3 million he had embezzled!”
He had called in a forensic accountant after our initial meeting. The forensic made similar comments about the .97 cents among other things. The accountant started asking the bookkeeper some hard questions.
The next thing you know, the bookkeeper had a family emergency and didn’t come into work the next few days. He didn’t think much about it until the bookkeeper couldn’t be reached. His phone number was out of service. He couldn’t find him anywhere. The bookkeeper had fled the country.
Wow, that’s an intriguing story. So what are the common signs of embezzlement?
With embezzlement, the most common situation is where the bookkeeper asks the owner for authority to write checks.
The bookkeeper will ask the owner,
“Can you put me on the checking account? So when we get bills I can just write a check out for them. Can I also get the company credit card to get copies or small office supplies?”
When they get a credit card and check writing authority, they’re off to the races.
They start buying small innocuous things like toilet paper, etc. They take it home, testing the waters with small purchases.
Embezzlement starts off small until they get bigger and bigger.
They start sending bills from bogus companies. They get a private mailbox from UPS, putting a legitimate sounding business name on it. They start sending checks to the fake company to their mailbox. They literally open up a fake business bank account, and deposit those checks.
So bookkeepers shouldn’t have access to the company Credit Card or ability to write checks?
No, never. It’s a sign of embezzlement when they want to have check writing authority. Or the company credit card, just to go get snacks or toilet paper for the office.
Rule of Thumb: Never give them Check writing authority or a Credit Card. If they absolutely need one, give them a preloaded debit card for small things.
Our company does bookkeeping for numerous clients. For payroll, they send us the time cards, we process it for them. We never print the checks or put the pin number in. We make the clients review the checks, put in their pin and pay their employees. We process the monthly, quarterly, and annual taxes on sales & payroll. We don’t actually pay their taxes for them. We never touch the money.
Embezzler bookkeepers will tell the owner, “I paid the payroll taxes for you.” They go to QuickBooks and print out an invoice saying they paid off the payroll tax.
But they really wrote a check to cash and took it to the bank to cash it.
Bad bookkeepers will never want any outside firm to do any of the bookkeeping or taxes for the company.
Because then they will have a much harder time keeping up to match their numbers with the outside firm.
Embezzlement is such huge issue. It’ very common and can happen to any business.
What is the most important sign of a horrible Bookkeeper?
If I could boil it down to one thing, this is the most important sign.
The horrible bookkeeper trains the boss like an organ grinder trains a monkey.
They do this through the Pavlovian Conditioning response. Every time the owner asks the bookkeeper any question,
“How much money is in the bank? Did you send the invoice yet?”
Any question, and the Bookkeeper will fly off the handle,
“Would you stop asking me questions?! Can’t you see I’m busy?!”
They’re conditioning the owner to never ask them any questions. It’s intentional.
If the bookkeeper is defensive, giving you a hard time or changing subjects all the time, they’re embezzling.
There is one phrase, in these exact words, from the University of Horrible Bookkeepers.
When they’re getting fired and leaving, “Chaos, disorder, destruction. My work here is done.”
What are Signs of a good professional bookkeeper?
Signs of a master bookkeeper include: Investing a minimum of 10,000 hours of practice in the bookkeeping trade. They understand that 90% is repetitive transactions and 10% are complex transactions.
They have climbed through the Levels of Competence in their trade.
Levels of Competence
Level I – (Ignorance) I don’t know that I don’t know about a particular subject
Level II – (Enlightenment) Now I know that I don’t know about a particular subject
Level III – (Competence) I can do it well if I really concentrate hard and pay attention
Level IV – (Mastery) I know it well enough to do it in my sleep
There is another trick to knowing who is an excellent bookkeeper.
This is my personal secret.
One universal thing that never fails to perform is this test.
Ask them to go to their local DMV and bring back a copy of their driving records.
The Driving Test
Visualize somebody who has one or more DUIs, reckless driving, speeding, any moving violation. What they’re telling you is, that they are not the least bit afraid of authority, uniformed officers with guns, licensed to kill. They’re not afraid of the police, so they’re sure not going to be afraid of you.
A good bookkeeper brings in their driving record, looks at you funny. And the record will be completely, totally blank.
Only a few groups of people have bad driving records. It’s relational. Bad drivers usually lack integrity.
“You’re looking for the Thread of Integrity, weaved into their lives.”
But there is an anomaly here. Very successful business people also have bad driving records, because they’re always in a rush to get to their next meeting or event. So they usually have a driver to speed for them.
Another effective test is the Dollar Bill Test.
Pull out your wallet. Pretend to search for something. Take all your money out and put it on the bookkeeper’s desk while looking for something in the wallet. Then pick up all the bills and put everything back, except for a $20. You “accidentally” leave the bill, shove it underneath something on the bookkeeper’s desk.
A good bookkeeper will always bring back the bill. “I don’t know what you’re doing, but you left this on my desk, here.”
Bad bookkeepers, will never bring it back.
Another small test. Ask the bookkeeper, “what do you think about this? Can we get away with doing ________.” Make something up. If they look at you kind of funny, they’re a good bookkeeper.
Lastly, it always pays to do background checks.
How do you personally find good bookkeepers?
It’s very difficult to find them. Good bookkeepers find a job, and practically stay there all their life. They find a good job, stay happy as a clam and just won’t leave.
We usually hire our own. We find some interns, train them and keep the good ones. We have a few that’s been with us for many years.
I also always do the driving record test. When I spot a record with one DUI they say, “I can explain, it was just one mistake.”
“It’s not your fault, the world is against you, and so am I. Now leave”
Good ones are hard to find. When you find a good one, do everything you can to keep them.
Here’s how to keep them: Treat them well.
- Make sure they understand what is expected. Have clear expectations set and written for them.
- Make sure they have all the right tools to do the job.
In 2016, each of our computers are $6,000. Each of our bookkeepers have three 42 inch monitors. We provide very comfortable chairs and desks. They have small fridges always stocked with snacks and drinks.
If anything gets old and begins to break. We replace them right away.
A bad bookkeeper doesn’t care about these things. They’ll work out of a 19 inch monitor. A good bookkeeper won’t put up with for very long.
How can people reach you?
They can email me at email@example.com
Or reach me at my website.
Have a question? Ask below!
Randal DeHart, PMP, QPA
Randal DeHart is a Certified Project Management Professional with several years of construction project management experience. His expertise is in construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others.
He is the co-founder of Business Consulting and Accounting in Lynnwood, Washington. He is the leading expert in outsourced construction bookkeeping and accounting services for construction companies across the USA. He is experienced as a Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, QuickBooks For Contractors Expert and Xero Accounting Specialist and Bill.Com Certified Guru.
This combination of experience and skill sets provides a unique perspective which allows him to see the world through the eyes of a contractor, Project Manager, Accountant and construction accountant. This quadruple understanding is what sets him apart from other Intuit ProAdvisors and Xero accountants to the benefit of all of the construction contractors he serves across the USA.